UK economy 'faces tough recovery'

The UK economy has begun to emerge from recession but growth next year will be fragile, a forecast by business group the CBI has warned.

It predicts UK GDP will grow by 0.3% between July and September from the previous three months, and will rise by 0.4% between October and December.

However, it said a lack of demand meant it was hard to foresee rapid growth.

January's increase in VAT would dampen spending, it warned, while firms would be "cautious" in raising output.

The next 18 months are going to be quite tough

Richard Lambert, CBI

Growth in the three months to the end of September would follow five consecutive quarters of contraction which has seen UK GDP fall by a cumulative 5.5%.

CBI director-general Richard Lambert said that the short-term outlook for the UK was "brightening" thanks to the recovering global economy, the weak pound and the government pumping more money into the economy through its quantitative easing programme.

There was also likely to be a pick-up from firms that have run down their stocks raising output to meet demand, he added, while consumers were likely to bring forward spending before VAT rose from its temporary 15% level to 17.5%.

"But once these two boosts are out of the way there is no clear driver of robust economic growth into 2010," said Mr Lambert.

He told the BBC that "the next 18 months are going to be quite tough. Household consumer spending will remain tight, businesses will be hunkering down and the government will be pulling its horns in."

Even when the economy technically emerges from recession, he said, "it's not going to feel very different to three months ago".

'Big concern'

One major reason for this is that unemployment is expected to keep rising.

The number of people out of work in the UK is at 2.47 million - its highest level in 14 years.

And the CBI predicted that continued job losses would see unemployment peak at about 3 million in the second quarter of 2010.

Worries about job security and weak rises in wages would mean that households opted to save more and pay-down debt, rather than spend, it said.

The sharp fall in business investment and the state of public finances were also a "big concern", Mr Lambert said, adding both would "affect UK economic prospects in the years to come".

Chancellor Alistair Darling has forecast that public sector net borrowing will reach a record £175bn this year as the finances are hammered by recession - though several economists have predicted that at the current rate of spending, borrowing would substantially overshoot this forecast by £50bn.

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